Saturday, June 26, 2010

I haven't read Nudge. But I've listenedto, and read so much about it that I feel like I've read it.

Basic thesis is this--there are ways to influence people's choices (paternalism) without forcing them to make a choice (libertarian), by changing defaults and ordering options. Governments and companies should order choices in such as way as to encourage the selection of the best choice.

Three examples they use:

1. Whether you put the ice cream or the fruit at eye level influences whether people select the ice cream or fruit. So healthy foods should be put at eye level.

2. Making enrollment in a 401k program the default, while still allowing people to opt out, makes enrollment go way up. Thus, enrollment should be the default.

3. Pension systems are too complicated and do not help workers pick good pension option. They should be simplified and make the indexed fund the defaults, or guide workers to pensions that are age-appropriate.

Libertarian paternalism is better than just straight paternalism, because even if the government is nudging you to a choice, at least you still have the option to select something else. But I still have a few problems with it.

1. It's based on the idea that humans don't know how to make choices that are best for them. Maybe they don't. But then why should be trust other humans to nudge them towards better choice? Don't they suffer from the same weaknesses?

2. On top of just having the same perception biases that may prompt the same mistakes, government is also subject to special interest lobbying that may encourage them to nudge towards the option that benefits a constituent rather than citizens at large.

Thaler's response would probably be bureaucrat have to make some choice, should they just chose something random or should they try to make a default choice that is in the citizens interest? But maybe randomization would be better than a choice guided by special interests.

3. Also, another problem is it seems like libertarian paternalism is a way to make government do something better that it probably shouldn't be doing in the first place. Like making a better pension plan. Government doesn't need to do that, and usually does it badly.

Thaler's response would probably be, government is doing these things anyway, so why not help government do it better.

4. If bureaucrats really can nudge citizens towards better choices, then can't they also just make a better choice? If people are clearly better of when they opt into their 401k, why not just skip the "nudge" part and pass a law that requires everyone to opt in?